Kupferman v. Consolidated Research & Mfg. Co.

459 F.2d 1072 (2nd Cir. 1972)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

To access this section all you need to do is click here and register.

Facts

Daniel Jacobson, a former director of Consolidated moved, on behalf of Consolidated and himself, to have the 1962 judgment vacated on the ground that the court would not have entered it if the judge had been aware of a release executed by Vickers Christy in favor of Consolidated, which was known to the receiver's attorney but not to the defendant's. Jacobson now appeals from the denial of that motion. The issues sprang from an agreement dated August 22, 1960, wherein Vickers Christy, as underwriter, undertook to use its best efforts to sell 50,000 units, each consisting of one share of Class A and one of Class B stock of Consolidated at $6.50 per unit. If all the shares were sold within 45 days of the date of a post-effective amendment to the registration statement, Vickers Christy was to receive a commission of 65 cents per unit, and $10,000 for expenses. In addition, the agreement provided that Vickers had the right obligation to purchase from the Company, and the Company shall sell to you, 6,250 shares of Class A stock and 6,250 shares of Class B stock at a price of $1.00 per share. Things didn’t go as planned. Consolidated's financial condition was so poor that it prevailed upon Vickers Christy to release proceeds of subscriptions which, under the underwriting agreement incorporated in the registration statement, were to be held in escrow pending completion of the underwriting. Some of the checks transmitted by Vickers Christy seem to have bounced. However, all the units were sold by December 1960. No one paid much heed at that time to just when the sale of the 12,500 shares to the underwriter should occur. Vickers Christy had its books inspected by the SEC. investigation revealed that the firm's books were not current, that at December 30, 1960, its liabilities exceeded its assets by $71,311 and that an additional $82,820 of capital was needed to comply with the SEC's then-operative net capital rule. The SEC brought an action, and on advice of counsel, Vickers Christy stopped transacting business, and its principals devoted themselves to attempting to correct the deficiencies. The 12,500 Consolidated shares began to appear as the pot of gold at the end of the rainbow. The bid price in the OTC market had risen to $18 per share. Vickers' special counsel advised that the 12,500 shares could be carried in its trading account at a 30% discount, even though they could not be then sold to the public. Vickers seems to have lacked the wherewithal to buy them. Daniel Lieberman, an accountant, agreed to provide $9,500 of the total purchase price in consideration of being allowed to retain 4,500 shares. Consolidated, however, was dragging its feet with respect to issuing the shares, avowedly because of its belief that Vickers had violated the underwriting agreement. The sale of the 12,500 shares to Lieberman and his partial transfer to Vickers Christy were consummated on February 10, 1961. Consolidated's transfer agent authorized issuance of the 12,500 shares to Lieberman. Vickers' attorney rendered a hand-written opinion to Consolidated stating that Lieberman understood that the sale of the shares was restricted and that the issuance of the shares to him was not a public offering requiring registration under the Securities Act of 1933. Finally, and most important, Vickers Christy and Vickers individually executed a release to Consolidated. Vickers Christy prepared a revised balance sheet, dated as of February 10, 1961, but the judge granted the SEC's motion for a preliminary injunction and appointed Theodore R. Kupferman as receiver of the assets of Vickers Christy. In October 1961, after various unsuccessful demands on Consolidated to file a post-effective amendment with respect to 6,000 shares still held by him, the receiver began an action against Consolidated, seeking damages for breach of its agreement to do so. Consolidated was also in deep trouble. Until a receiver was appointed, it had gone through three law firms. The files Purcell did not contain the February 10 release. In the course of pre-trial proceedings in May 1962, the Christy attorney did obtain a copy of the February 10, 1961, Vickers Christy letter to Consolidated, which we have quoted above. Construing this as merely a consent by Vickers Christy that the shares be issued to Lieberman rather than itself, he made no inquiry whether there was any other instrument of release. Ross offered the letter, but not the release or the opinion letter, in evidence at the trial. The judge gave the receiver damages against Consolidated of $136,500, with interest from May 26, 1961, for breach of its agreement to file a further post-effective amendment. The judgment was impossible to collect, and the receiver obtained an order from the district court, in April 1964, appointing himself receiver of Consolidated also, with authority to bring all actions necessary to recover property of the judgment debtor. It was then that Purcell first learned from the Friedman firm about the release. Three years later, Kupferman, in his capacity as receiver of Consolidated, brought an action in the Supreme Court of New York for New York County against appellant Daniel Jacobson and eight other persons who had been directors of Consolidated in 1961. One cause of action asserted a conspiracy by the defendants to cause Consolidated not to file the post-effective amendment despite its agreement to do so. The new receiver moved to strike the defense; the defendants cross-moved for summary judgment. The trial justice denied both motions in an opinion; both sides appealed. Jacobson moved the District Court to vacate its judgment of 1962. That motion was denied.